華納兄弟探索 (WBD) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2011 Discovery Communications Inc.

earnings conference call.

At this time all participants are in a listen only mode.

Later we'll facilitate a question-and-answer session.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes.

I will now turn the presentation over to your host for today, to Craig Felenstein, Senior Vice President of Investor Relations.

You may proceed.

Thank you, Francis.

Good morning everyone and welcome to Discovery Communications second quarter 2011 earnings call.

Joining me today is David Zaslav, our President and Chief Executive Officer, Peter Liguori, our Chief Operating Officer, and Brad Singer, our Chief Financial Officer.

Hopefully you have all received our earnings release, but if not, feel free to access it on our website at www.discoverycommunications.com.

On today's call we will begin with some opening comments from David and Brad, after which we will open the call up for your questions.

We urge you to please keep to one or two questions so we can accommodate as many folks as possible.

Before we start, I would like to remind you that comments today regarding the Company's future business plans, prospects, and financial performance are forward-looking statements that we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

These statements are made based on management's current knowledge and assumptions about future events, and they involve risks and uncertainties that could cause actual results to differ materially from our expectations.

In providing projections and other forward-looking statements, the Company disclaims any intent or obligation to update them.

For additional information on important factors that could affect these expectations, please see our Form 10-K for the year ended December 31, 2010 and our subsequent filings made with the US Securities and Exchange Commission.

And with that, I will turn it over to David.

Thanks, Craig.

Good morning everyone and thank you for joining us.

Discovery delivered another quarter of strong growth in Q2 maintaining the financial momentum we generated at the start of the year as well as the strength we exhibited throughout 2010.

We once again achieved double-digit OIBDA gains despite the expected higher content amortization that we previously highlighted.

Our focused investment in content remains a strategic imperative as we look to further strengthen our established brands, build new genres, and take full advantage of our robust global distribution platform.

It's important to note that while our amortization in 2011 is catching up to our cash investment over the last several years, we have only increased our content investment at a compound annual rate of 6% to 7% since 2008 as we remain diligent with regards to success-based investment.

Maintaining an appropriate cost structure continues to be a priority.

So as we look to grow revenues and build out our content assets, we remain persistent about controlling spending that does not end up on the screen evidenced by margins increasing to 48% this quarter.

Brad will take you through Discovery's quarterly results in a few minutes, but before he does, I would like to illustrate how our sustained investment in content is translating into stronger brand position and increased financial returns, while also setting the company up to deliver continued robust operating strength in the future.

About two-thirds of Discovery's content investment is dedicated to our US networks where we are focused on strengthening the brands and storytelling of flagship networks Discovery Channel and TLC.

Building new brands and genres with ID, Animal Planet, Science and Military and filling the creative whitespace with our joint venture efforts in OWN and the Hub.

Our investment has allowed us to create a diverse portfolio that appeals to both men and women, delivers real value to affiliate and advertising partners, and positions us to grow market share across our networks.

This past quarter, ratings were up 6% across our domestic portfolio and we leveraged those bigger audiences into another quarter of double-digit advertising growth.

The biggest engine driving both ratings and advertising gains remains Investigation Discovery.

ID is the leading brand for viewers looking for high-quality investigative storytelling and has moved from the number 26 ranked network in the US for women 25 to 54 last year to the 18th ranked network today.

It continues to be the fastest growing network in cable with primetime viewership up nearly 70% this quarter driven by Behind Mansion Walls, True Crime with Aphrodite Jones, and Disappeared.

ID is now in over 77 million homes and with commitments to be in over 80 million homes by year end.

When you combine this reach with an audience that has one of the longest viewing times of any cable network, it becomes a great value proposition for advertisers.

We also delivered solid ad growth this quarter from our flagship networks, Discovery and TLC.

Discovery leveraged the continued ratings strength of Deadliest Catch as well as the success of several documentaries which focused on breaking news stories such as Killing Bin Laden and Megaquake.

Discovery remained a top five network among adults 25 to 54.

And we are excited about the number of new hits we have returning in the back half of the year including Gold Rush, Flying Wild Alaska, and Sons of Guns which returned for its second season in July and is delivering double-digit ratings gains from season 1.

TLC grew primetime viewership 3% this quarter including 7% in the key women 25 to 54 demo, led by returning series, Sister Wives and Toddlers and Tiaras While also launching several new hits including Extreme Couponing, New York Ink, and My Big Fat Gypsy Wedding.

Gypsy Wedding is a great example of the advantage of having boots on the ground in so many markets like we do.

We saw and heard the early buzz the Gypsy series generated in the UK.

We quickly acquired it and brought it to the TLC in the US and are launching a companion series on the US gypsy community in the fourth quarter.

TLC's second-quarter momentum has continued after the quarter as once again it is enjoying summer success highlighted by the latest iteration of its Say Yes to the Dress franchise, Bridesmaids.

For the month of July, viewership was up 6%.

And TLC was the number 2 network in America behind only USA network in the women 18 to 49 demo, giving TLC some strong ratings momentum heading into the second half of the year.

While our ad sales growth was led by Discovery, ID and TLC, all of our domestic networks delivered gains during the second quarter, including Animal Planet which developed several new successful series including Finding Bigfoot, while enjoying performances from the return of River Monsters and Whale Wars.

Overall, our sustained investment in content has resulted in a domestic portfolio that is broader and deeper than it has ever been.

The size and quality of the audience we are delivering enabled the company to generate another quarter of double-digit ad growth as well as capitalize on the robust upfront market.

In the upfront, we garnered upfront pricing rising increases in the high single to low double-digit range while achieving the highest dollar volume in our history.

We will also able to generate higher volumes from many of our emerging networks as advertisers recognize the value of the brands we have invested in.

As for what we are seeing today, current scatter pricing remains robust and healthy.

And with a balanced portfolio of strong brands that reach both men and women demographics, we are optimistic that advertising revenues will grow solidly for the remainder of the year.

At the same time that we focused on strengthening our consolidated channels, we remain committed to growing the audiences at our 2 domestic joint ventures, Own and the Hub.

Last month, we announced that Oprah will take over as CEO and Chief Creative Officer of OWN.

Oprah was just with me at TCA last week in LA and she is in place as CEO already.

Oprah has also reunited with the operating and creative leaders from Harpo, Erik Logan and Sheri Salata, who she worked with for many years and her team is already working on creating compelling content for the network.

We now have her creative team in place and a more robust lineup set for the fall and spring.

Including the Rosie Show which launches on October 10, plus Own your Life which integrates Oprah's 25 year library with significant new Oprah content in each episode.

In addition, in January we will launch Oprah's Next Chapter.

All in, we are optimistic about the brand strength, content pipeline and ratings potential of the network.

We are also encouraged by what we are seeing at the Hub especially with animated programs.

June was the Hub's highest rating month since last December and Margret Lesh, Hub's CEO is continuing to make real progress with the new summer schedule.

While we see continued opportunity ahead with our established and growing domestic channels, it is the current momentum and potential of our international assets to present a meaningful unique opportunity for us.

I think we have built the best international platform media company in the world.

And we have done it over the last 20 years.

We have broad and deep distribution encompassing over 200 countries and territories with an average of 5 or 6 channels per market.

And we have also a leadership position in high definition with channels in over 100 countries.

We are generating significant financial returns today, while positioning ourselves to take advantage of the evolution of pay TV in the years ahead.

Pay TV penetration continues to grow across the globe.

And in most markets, it still has a long way to go before it reaches the penetration levels we see domestically.

Our subscriber base internationally expanded by 15% this quarter.

And that translated into affiliate growth of 12% in local currency terms.

While nearly every region exhibited double-digit gains, we are seeing some of our fastest growth in India, and in Russia and in Latin America where Brazil continues to lead the way.

Latin America is a great example of a historically underpenetrated market that is delivering real growth.

Operators are introducing packages to appeal to the emerging middle class and our long-standing relationships allow us to ensure distribution on the faster growing packages in that region.

Pay TV penetration in Brazil still has a ways to go as it is just over 20% of the market.

But it is up from only 14% in 2009.

Because we have 11 channels in that market, we will continue to benefit as that market grows and evolves.

Combining a larger addressable origins audience across our international platforms with a more robust programming offering, has resulted in substantial viewership gains.

These additional eyeballs are translating into sustained double-digit advertising growth.

With advertising still only making up about a third of our international revenue, we have plenty of room to grow this revenue stream and increase international margins.

The breadth and diversity of our platforms also allows us to be nimble to take advantage of market trends and opportunities.

There is no better example than how quickly we are building TLC into the most widely distributed female network in the world.

We are replicating the strategy domestically of delivering a diversity to our affiliates and advertisers by offering a strong female flagship to complement Discovery Channel.

TLC recently launched outside the US and in Netherlands.

And is now in over 80 million homes in 34 countries and we expect to significantly exceed our goal of 100 million homes by the end of this year.

At that point, TLC will be the most widely distributed female network in the world.

But TLC is not the only content asset we are aggressively building.

We are always on the lookout for unique programming opportunities, whether capitalizing on the ability to diversify our distribution across all platforms in Italy with Real Time, which we launched 8 months, and is now a top 10 network trailing only the broadcast networks.

We're building local and customized channels across India where we just received approval for 5 new channel licenses.

Together these new initiatives are contributing a significant portion of our ad growth internationally and we will continue to be opportunistic in taking advantage of the unmatched platform we have assembled.

Building new brands and strengthening our content pipeline remains our first strategic priority.

But as we said in the past, we are focused on thoughtfully allocating capital.

We have a very strong balance sheet and we will generate over $1 billion in free cash flow this year.

We will continue to seek out value enhancing opportunities, whether organically or through adding to our existing asset base, while also returning capital to shareholders.

Since last November, we have returned over $1 billion in capital to our shareholders, and with the additional $1 billion buyback just authorized by our Board, we will continue to do so aggressively if it is the best use of our balance sheet.

Discovery had a great first half of 2011, delivering strong financial results while simultaneously investing in our brands and platforms around the globe.

With the continued robust operating environment, a diverse collection of content assets, and a strong balance sheet, we are poised to continue our operating and financial momentum for the rest of the year.

Before I finish up, I want to mention, that as most of you know, Brad will be leaving us after the first quarter of next year.

He has been a great financial and operational leader and he leaves us in tremendous shape to build upon the growth we delivered over the past few years together.

We wish him the best of luck and I will now turn the call over to Brad Singer.

Thanks David.

Discovery continued its robust performance in the second quarter and a favorable operating environment enabled us to enjoy double-digit global ad growth and strong international subscriber gains.

Total revenues increased 11% compared to the prior year, led by 20% international revenue growth and complemented by 6% higher domestic revenues.

Please note that pro forma for the deconsolidation of Discovery Health Network, which had $21 million in revenues in the prior year, excluding currency fluctuations, our company revenue growth remains 11%.

Our total operating expense in the quarter increased 10% compared to the prior year, primarily due to the higher content amortization we highlighted previously, as well as increased personnel costs.

As a result of our ability to generate strong revenue growth, we increased our adjusted OIBDA 12% to $510 million compared to the prior year.

Excluding the impact of foreign currency and the deconsolidation of Discovery Health adjusted OIBDA increased 11%.

Net income more than doubled to $254 million reflecting our improved operating performance and $105 million of losses related to the refinancing in the prior year.

Excluding the prior year losses on extinguishing our debt, net income increased over 20%.

Our free cash flow increased $242 million to $198 million in the second quarter of 2011 due to the improvement of our operating performance, lower tax and long-term incentive compensation payments and the prior year refinancing costs.

Turning to the operating units.

Our US operations delivered another solid quarter with domestic revenues up 6% led by 10% ad revenue growth and complemented by 4% domestic affiliate fee growth.

Excluding Discovery Health from 2010 results and nonrecurring revenue items, ad revenues grew over 13% and distribution revenues grew 6% compared to the prior year.

The substantial ad growth was on top of a 13% increase in the second quarter of 2010 and led by the strong performance in Investigation Discovery as well as the sustained favorable pricing and demand environment.

The attractive current market conditions continue to exist in 2011 as we anticipate our third quarter domestic ad performance to be slightly below second-quarter levels due to the tougher 16% prior year comparable performance.

Our domestic operating expenses were up 10% from the prior year with the significant majority of increases due to the expected higher content amortization.

On our reported basis, domestic adjusted OIBDA increased 4% versus a year ago.

Excluding the impact of Discovery Health and nonrecurring items adjusted OIBDA increased 5% from the prior year.

Turning to our international operations.

Our second-quarter revenues grew 20%, driven by 25% advertising and 18% of affiliate growth.

Excluding the impact of favorable exchange rates, revenues increased 14% led by a 17% increase in advertising and complemented by a 12% increase in distribution compared to 2010.

International ad revenue growth was driven by growth across our of regions led by Western Europe, which successfully launched TLC in several markets and repositioned Real Time in Italy.

For the first half of 2011 our international ad revenue, excluding currency fluctuations grew 19%.

This was even more impressive considering our 2010 first-half ad revenues had increased 35%.

Our international distribution revenue growth was led by continued strong subscriber additions in our Latin American, Eastern European and Asian-Pacific operations with a 15% year-on-year subscriber growth at our most fully distributed network, Discovery Channel.

Operating costs internationally were up 12% excluding currency fluctuations, primarily due to higher content amortization, sales commissions, and personnel costs.

Our international team continued to deliver strong OIBDA growth up 17% excluding the favorable impact of foreign currency, while thoughtfully investing in key growth initiatives, such as the roll-out of TLC and expanding our presence in emerging markets with office openings in Moscow, Kiev and Almaty.

As we look forward to the second half of 2011, we remain encouraged by the fact that the beneficial pricing and ad trends we have experienced over the last several quarter's have continued through July as well as by the ample up-front sales demands David discussed in his remarks.

As a result, for the full year 2011, we are refining our forecasts and raising our expectations of revenue by $50 million and adjusted OIBDA by $25 million.

We anticipate revenues of $4.075 billion to $4.175 billion, and adjusted OIBDA of $1.875 billion to $1.95 billion primarily driven by our revenue growth offset by acceleration of certain content costs on our digital networks.

We expect overall adjusted OIBDA growth of mid single digits for the third quarter due to the domestic revenue increases being fully offset by the increased domestic content amortization we have discussed previously and the timing of certain SG&A expenses, which we shifted from the second quarter with a resumption of double digit OIBDA growth in the fourth quarter.

Turning to the balance sheet.

We further strengthened our financial position this quarter completing a $650 million 10-year debt offering with an effective rate of 4.45%.

Over the past year, we have successfully reconstituted our balance sheet, significantly increasing our financial flexibility, while lowering our average costs.

With our strengthened balance sheet and strong operating performance, we continue to return capital to shareholders through execution of our share repurchase program.

Our first priority is to invest our capital in our core business to enhance our shareholder returns.

To the extent we have not found opportunities with attractive financial returns, we have accelerated utilizing the cash in our balance sheet as well as the cash we generate to repurchase our shares.

We repurchased $210 million of our Class C shares during the quarter and over $609 million in total under our share repurchase program, in addition to the repurchase of $500 million preferred Class C shares.

As a result of our share repurchase activity to date, we are increasing our share repurchase authorization by another $1 billion to enable us to continue to thoughtfully repay our capital to our shareholders.

Before I finish up, I would like to thank David Zaslav, a great friend and partner, John Hendricks and the Discovery Board for providing me the opportunity to be a part of Discovery.

Discovery is a truly unique company with a wonderful culture and terrific colleagues.

We have worked hard to ensure that Discovery delivers sustained operating performance while further strengthening its strategic position.

While it is difficult to leave a great position in a great company, in March of 2012, I firmly believe Discovery is in a strong position to achieve long-term success and continued growth.

I hope everyone is enjoying Shark Week and will enjoy the premiers of Curiosity this Sunday, Crazy About Pippa on TLC, Who The Bleep Did I Marry on ID and Tanked on Animal Planet.

David, Peter, and I will now be happy to take your questions.

(Operator Instructions)

Doug Mitchelson, Deutsche Bank.

Brad, it's a bit early to say good-bye so we will leave that for a later call.

David, when you look across the major media companies, I think what stands out for you is the international platform, I think it's the most profitable.

You talked a bit about the international growth prospects in your prepared remarks, but when you look at those big bucket, first, are you worried at all about maturity in Europe and the difficult economic environment there right now?

You talked about leveraging US channels and building some local international channels and emerging market growth.

When you think about those 3 buckets, what is the biggest 2 or 3 drivers of international the next few years to the extent that growth right now is strong and we're hoping it's sustainable?

We always are somewhat dependent on the economic environment, but we have seen real meaningful demand around the world on the advertising side, so there's a bit of a disconnect.

Our advertising strength this past quarter was really across the board, but if you look fundamentally at our international business, we have a couple of levers.

One, we have between 5 and 6 channels in over 200 countries and most of those markets are still growing substantially.

You saw 15% sub-growth which is like the US, 7 or 8 years ago.

We expect that we'll continue to see meaningful sub-growth over the next several years as pay TV becomes more mature.

It is in its adolescence in a lot of the markets and in some of the emerging markets you're seeing really robust growth.

On the advertising side, we still only make about a third of our money.

Here in the US it's about 50-50.

Maybe a little bit more on advertising.

Internationally, it is about 35%.

That's another indicator that we need to mature more as we take our channels around the world.

We can really have a lot of growth there.

One of the other wins that's helping us is when you see in the US that broadcast dollars about 15 years ago started to move toward cable, you are starting to see that across the board around the world.

In some of the markets that are emerging, it is happening slower.

But, for instance in Russia, most of the money was being spent on broadcast.

In the past 2 years, it's transitioning to cable and the CPMs are starting to increase.

That is a trend that we expect to continue for the next several years and will help us.

Finally, our content travels well and we have really been reinforcing the value of our brands and our content around the world.

We talked about several years ago that we thought we were the best platform media company in the world, and we were on a journey to become a great content company to complement those platforms.

We still have a long way to go, but this past year we put a stake in the ground with TLC.

We said we wanted to take TLC around the world and make it the largest women's network but also have it have real impact.

And it is having impact.

In a number of markets, it is a top 10 network in the market.

In Italy, where we launched our women's network called Real Time, we had it on a cable platform, Sky Italia, and we put it on a broadcast platform and in a market like Italy where there wasn't a lot of growth, we were able to grow our advertising 100% this past quarter.

So it is sub-growth which we were positioned to take advantage of because we were there so early; it is ad growth which is happening generically anyway, but we are growing our market share, and it's taking advantage of our brands and really building up our ratings.

We feel very confident, Mark Hollinger is our best operating leader in the company and we moved him over about a year ago to run international.

He has built a great team, doing a great job, and it is a unique advantage.

I think if we add that $90 million of ad revenue to have it match your subscription revenue, you'd get margins close to 70%.

It looks like the overall international margins below US is not actually a hurdle here.

Ben Swinburne, Morgan Stanley.

Just 1 clarification question for Brad and then 1 for David and Peter.

Advertising outlook for Q3, Brad, are you talking about slightly below the reported ad number or are you backing out the $8 million one-timer that you had this quarter?

Slightly below the adjusted 13% number.

And then picking up a little bit on the international point, David, you have a unique platform and I'm sure in markets like Latin America.

DirecTV reported this morning almost 500,000 net adds in Latin America, the market is just booming.

I'm wondering how you think about investing in content more substantially in those markets.

I'm sure if you look back over your career at NBC and think about cable in the US years ago, it is fighting and scratching and getting broadcast money, but you have such an opportunity in these high-growth markets to really go for it on market share in terms of ratings and adding more hours of programming, maybe more local.

You have an incredibly profitable business.

How do you guys think about balancing investment in those really high-growth markets to try to take advantage of what seems to be a secularly booming market?

We have a targeted strategy where we look at the higher growth markets and we lean in.

Latin America is a good example of that, because in Latin America we have Discovery Kids, which is in most of the markets.

They're the number 1 kids network for kids 6 and under.

In Brazil it is the number 1 cable network in all of Brazil because of co-viewing.

We have Discovery Kids, we have the equivalent of Home and Garden down there, a channel called Home and Health, we launched it early, we've invested in it and it has been very successful for us, as well as Discovery, Animal Planet, and TLC.

When we look at Latin America, we have the most balanced portfolio there.

But we are leaning in.

I was in Brazil, I was in Argentina and Chile recently.

We have a very strong team driving that and we are very cognizant of the fact that Latin America, India and Russia are big opportunities for us because we have a lot of platforms in those markets.

We have 9 channels in Russia.

We're going to launch 5 more channels in India.

These are markets that have a lot more wind at the back, and given the fact that our brands are strong there and we have got boots on the ground, that we should accelerate our opportunity there.

Don't underestimate Western Europe.

We had a lot of growth in Western Europe, and that has a lot to do with the fact that we have been in those markets, we're growing market share, and advertising continues to grow in a number of those markets, whether it be in Germany, the UK and Italy.

We are leaning in, in the growth markets, but we are continuing to take advantage of the fact that we have real market share and scale in markets like Western Europe.

Spencer Wang, Credit Suisse.

A question on US affiliate revenue growth.

Maybe for David and Brad.

Pay TV subscriber growth over the last couple quarters has been pretty close to zero.

If this persists, because of the economy or housing or whatever, you think you can still sustain 6% affiliate revenue growth just on affiliate fee increase and higher digital penetration?

When you look at the numbers, our fully distributed networks experience year-on-year, the number of subscribers are about 0.5% higher.

Our digital networks are about 5% higher.

If you combine that with our rate increases, that's what got us to the 6% growth rate.

Those are the components that got you there.

Now, you can play with the growth rate of digital or household formation.

And those are the variables as you move forward in the future.

Michael Nathanson, Nomura.

Hello.

Michael, you are on.

Okay.

Great.

Operator let's move onto the next question please.

Jessica Reif Cohen.

A couple of things; move a little away from international.

The guidance you increased for revenue and EBITDA, but not for net income, is that because of the JVs?

It's because of 3 reasons; 1 is the JVs.

If you look at our OIBDA increase it is $25 million.

That translates naturally with our tax rate of about $15 million of net income.

That $15 million we did not increase because we have higher interest costs related to the bond offering we just did, so that's 1 component of it.

The JV have not performed as well as we would have hoped, so that's 1 component.

Our tax rate was up about 0.5% as we looked at it on a GAAP basis.

Those 3 things led to that $15 million not flowing through.

I know you guys tried in the past to syndicate some of your products, maybe it wasn't as successful as you would have liked.

But the growing platforms from Netflix and Amazon, here and domestically as well, is this an opportunity to reuse your content?

We sat out to the use of our long-term content on the web and we really leaned in aggressively with clips with our characters and driving social media because the economics were not there.

We did not think the economics, the right business model was there.

There's probably never been a better time to be in the content business, particularly when you own your content.

We have a 20-year library we've converted into HD and digitized it and a lot of that is content that really works and has a long life.

The good news for us is that we own all of our content and for the first time in terms of older windows, there are a number of players that are interested in offering content in different ways, whether it's Netflix, Amazon, Google.

Wal-Mart announced the other day that they're starting a service.

All of that directionally is an opportunity for us.

What we are working through right now is getting the right value for our content in any of the deals that we do.

It is very encouraging to have a number of new players out there that are looking to offer existing content to consumers and that the consumers are starting to like that, the opportunity to consume it.

For us, we think it is good.

We're talking to all of them and will continue to talk to them.

Richard Greenfield, BTIG.

Over the last 5 or 6 years you have had pretty incredible ratings performance throughout your US networks.

The Discovery Channel is 1 where it probably has not gotten as much focus, specifically versus your developing stories which have worked out.

When you look at it, David, when you came in Billy Campbell left and you've had Jane Root, John Ford, Clark Bunting, Eileen O'Neill technically overseeing both major US networks now.

A lot of people running Discovery Channel, and would love your thought process.

Where do you think the core Discovery Channel is, why has there been so many management change, and how are you thinking about management going forward as Clark leaves?

Clark has been a great steward of Discovery and Clark is going to be retiring in about 9 months or so.

I spent time with Clark over 20 years ago when I was a lawyer and Clark was at Discovery.

So he has made a lot of great contributions to the Company.

He has really helped to build Discovery over the last year.

The challenge that we had is that we had some great series that were very robust with really strong characters and storytelling, and then we had a number of other series that were just okay.

So we have been struggling to get a great creative team in there to really drive better stories, better characters and deliver on the real promise of Discovery which is what is Discovery when it 's at its best.

We're excited about what we have now.

We have a number of new series with Gold Rush, Flying Wild Alaska, Sons of Guns, we have a new creative slate that Clark and Eileen are putting together and we have a show called Curiosity which the founder of Discovery came up with and we've all gotten behind in a big way.

It launches this Sunday.

It will be every Sunday, a show about curiosity, which is kind of the heart and core of our brand.

We started experimenting in the last couple of months with instamentaries we did a Bin Laden special, we did a Megaquake special, both of which worked.

I would say right now Discovery is good, but it could and should be better.

By putting Eileen O'Neill and getting her involved in the network, she has brought a lot more energy and a real drive toward that storytelling and character.

She did it at TLC, where, when she got to TLC, it was the number 20 network in America, and as I mentioned, last month it was the number 2 network for women in 18 to 49 behind only USA, and she has about 25 shows that get over 1 million viewers.

She built a team that really focused on story and character.

That is what we're doing at Discovery now.

I think we're making progress.

The good news is that I think there's a lot of headroom for us to grow.

Discovery has performed at market level for the last 3 years or so.

We think we can outperform, we should outperform, and that is our expectation, that is Eileen's and Clark's expectation.

You should look for us to do that.

David Bank, RBC Capital Markets.

This success of ID has been pretty astounding.

Once you get past the next leg of relatively greater distribution, as you guys have done this a bunch of times before, how long is the tailwind likely to last?

The first boost obviously comes from just increased distribution and then that comes with other benefits that go on into the future.

When you look at ratings success, how much of it over the past year is about sort of same-subscriber ratings increases versus increased distribution-related increases, if it is possible to look at it that way?

Henry Schleiff has been on a mission with ID.

He and his team have done, I've never seen a cable channel grow this way.

It is the number 18 channel for women in America today in the 25 to 54 demo, and the astonishing thing is, it's in a little less than 80 million homes and there's still only 35% of the people that have ID know that they have ID.

There's tremendous upside there.

About two-thirds of the growth is coming from pure Henry's team building shows, show after show that's generating interest and ratings and it has -- I am not going to say it is the longest, but it might be.

It's up there in terms of the amount of time that people spend watching a network.

We have a group of people watching ID that really love it a significant portion of the day.

That is another indicator that we have upside, when you put that together with the fact that 65% of the people that have it don't know that they do.

So we are very excited about ID.

The other thing that gives us some real opportunity is that it grew so quickly that we have not been able to really get the value on the CPM side, and that is traditional in the media business.

We were doing mostly DR, and then we started weighing in, Joe Abruzzese and his team started bringing in national advertisers about 2 years ago.

We started from a pretty low base and all of a sudden, we have the compelling ratings and it takes time, probably 2 to 3 years, for us to be able to get the CPMs that this channel deserves in light of the audience that it's delivering and the quality of the audience that it is delivering.

We are getting the growth of the audience; we're getting the growth of the subs, and we should get a very meaningful growth in the CPM.

It is an unusual asset.

The credit goes to Henry Schleiff and his whole team that are having a ton of fun building a great network with great storytelling.

One last thing on that, which again will help on the CPM and distribution growth front, is time spent viewing.

It is a leading, if not the leading network, with the audience spending their time in front of these shows.

That is an incredible indication about the popularity depth of storytelling that ID is providing.

Anthony DiClemente, Barclays Capital.

First for Brad, I just was hoping you could give us some more granularity around international in the third quarter, particularly advertising and affiliate.

You were helpful on the domestic side for the domestic advertising trend.

Can you help us on that a little bit, third quarter and then trending into the fourth quarter for international?

International will be somewhat consistent with the second quarter.

It shouldn't be dramatically different one way or the other.

That could change because you have less visibility internationally and you're in higher growth environments, but the trend should be somewhat similar.

In the third quarter and then moving to the fourth quarter?

In the third quarter.

Going back to an earlier question that was asked about affiliate fees, one interpretation of your aggressiveness around content investments in the US, is that you are trying to design your portfolio and your content to increase your negotiating power with your affiliates as those re-ups and renegotiations come up in the next year or 2, you will have some major re-ups with your traditional affiliate partners and then also with your digital distribution partners.

I'm wondering if you could talk about how you're preparing for those negotiations and then following on that would be.

Does it make sense for you to be opportunist on the acquisition front in order to build your portfolio of networks ahead of those negotiations with your partners?

We don't have any large deals that come up before 2012, and then they are staggered so we do have time.

There really is alignment.

In order for us to grow as a company, we need to grow our market share.

People still only watch 8 or 10 channels, and we are on a mission every day to have our channels be 1 of the 8 or 10 channels they spend time with.

When we grew this quarter 6%, it means 6% more people are spending time with our channels, and behaviorally, when you can get them to do that it's pretty sticky.

If we can grow our channels and people spend more time with us, then we are going to grow our ad revenue, and as you say, the stronger our channels, the stronger our hand when we sit down and have a discussion when our deals are up.

If you look at where we were when we did our deals, TLC was the number 20 or 22 service in America.

ID was Discovery Times, the Science Channel, really did not have a lot of original content several years ago and Military Channel was mostly library.

We've targeted TLC now as a top 5 channel in America, ID, a top 20 network and growing, and Science, a great niche network where we've really invested in quality content, Morgan Freeman's Through the Wormhole has been a real success for that network and there's a lot of original content that Debbie Myers and her team have developed.

Henry Schleiff has now been pushing on Military which has a good niche audience.

All of that are things we would do anyway, but it will be helpful to us as our 13 channels.

We also have Discovery Espanol, which depending on the month, has been number 1 or 2 network in America in the Hispanic space.

It goes back and forth with Galavision.

So the stronger our channels are, the better economics we can deliver quarter-to-quarter, the better content we can drive around the world, because our content goes around the world, and the stronger our hand.

And then of course now, there's this new opportunity whether it is TV Everywhere, which we are very supportive of but we have not done any TV Everywhere deals with the distributors yet.

Or new players like Netflix or Amazon or Google that want our content.

Having stronger content and stronger brands also makes us, gives us a more nourishing hand for those discussions.

There is full alignment.

We have to build our brands, better shows, better channels, better storytelling.

And so we do have clarity of purpose, which is helpful.

John Janedis, UBS.

A bit of follow-up from on an earlier question, but historically you have talked about Animal Planet and how you thought that network under-earned for a network of its size.

At this point, ID's audience is probably going to rival or surpass that network on a consistent basis by year end.

Can you give us your thoughts about maybe how that relative gap is narrowed and is the cash flow opportunity there in the mid-ten of millions as you do that?

We built a strong brand with Animal Planet.

It was a little bit profitable a few years ago it and now it is making a substantial amount of money for us.

We have been able to get the CPM up and it continues to grow.

It's hard to compare when we look at our portfolio of 13 channels.

There's no question that ID is a network where the audience is telling us that they want more of it and they want to spend more time with it.

It does not mean that Animal Planet is not strong.

It is strong, it has a great brand and we continue to invest in it.

Marjorie Kaplan and her team just recently launched Finding Bigfoot, a very successful show, and Whale Wars and River Monsters, there's a real following for Animal Planet.

We remain optimistic.

But when we look at the growth of ID, when we look at the growth of Science, when we look at the growth of Military, it is just encouraging that we have amortized our growth portfolio where we have more that we can learn on, and like any portfolio, there are some that are going to be doing better than others at different times.

We are just really listening to the audience.

On OWN, you gave a good update there, a couple weeks back I think OWN bought the rights to Undercover Boss.

I would assume that would be more expensive than the average cost of a program for the network.

I'm wondering to what extent you are going to increase your mix of acquired programming there and also, did you keep the investment to $215 million?

While we don't talk about the specific programming costs in any 1 element, that is split between 2 different network of ours, even as a combined cost, it is not near our averages even.

Might want to be careful about drawing too firm a conclusions about where we are going with the cost structure of any of our programming.

I will turn it over to Peter to the second part of your question.

We will continue to evaluate programming on an opportunistic basis.

Does it fit the brand or in this instance, brands?

Can we get it for a price that will create value?

We are going to go on it on an ad hoc basis.

It is not part of a long-term strategy to acquire programming.

But good opportunity, we took advantage of it, we are leveraging it over 2 networks.

Marla Backer, Hudson Square.

Now that Oprah has taken over the role of CEO and Chief Creative Officer at OWN, is Peter still as involved as he has been before that management change?

The answer is no.

It is good news.

We have Sheri and Erica there now, they ran Harpo before for Oprah and did a fantastic job.

They have a great working relationship with Oprah.

They came over, Peter transitioned, and we feel that with Sheri and with Oprah, that the network is in good shape and so I think it frees Peter up to come back and spend more time with us, so it is a positive, positive.

The outlook remains strong in terms of where spot pricing is and the advances you were able to obtain in the upfront, but relative to prior years, did you leave yourself more or less inventory to benefit if pricing remains strong or were you kind of cautious because the economy seems to still be uncertain now?

With regard to the upfront we sold about 20-ish% more dollar volume than we did in the prior year and half of that is price driven.

The other half, when we look at the inventory component was we were focusing on some of our non-prime inventory.

Our ad sales team is very good and very thoughtful that that's how they delivered the upfront dollars that were ultimately placed.

The other piece that Joe was very effective with is, instead of just looking at Discovery and TLC and Animal Planet, he was able to increase the volume and the quality of the business that we were able to put into our other 10 networks.

A big function of that was the quality of the brands and the network have really improved and have more awareness, but also that the market was strong and in a strong market Joe was able to build volume on those networks that sometimes have more DR.

So that's a real value to us, a real plus, plus.

Jim Goss, Barrington Research.

Domestically, launching a cable channel is notoriously constrained by shelf space availability and competitive issues.

I was wondering if you could discuss that situation internationally.

You were talking about adding 5 or 6 new Indian channels.

What is the environment like in those international markets?

Can you also talk about the balance of growth versus costs?

You've talked about TLC getting some better cost-wise programming in some of those international markets where it had to be indigenous product and did not transfer from the US.

How is that working with the other channels?

I am going to take the first part and Brad will talk about the growth versus cost.

The good news is that we got out about 20 years ago and invested significantly in building our platforms around the world.

In most markets, it is real beach front real estate.

When we have 11 channels in Brazil or 10 channels in Argentina, or 8 channels in Italy, if you had a great library and you went out and made a great pitch, in many cases you cannot get carried at all, or in some cases, if you're going to be carried, you'd be carried on digital.

As you go around the world, you would see 5 or 6 of our channels on analog with meaningful sub fees in what would look like a channel community that we had here in the US 10 or 15 years ago.

In most markets, the fact that we are there with these channels is a real strategic vantage.

In India, which is a growth market, the fact that we are there with a substantial number of channels with brands and success, we were able to use our boots on the ground to get, when they do say that there's going to be an opportunity for some additional licenses, we could be at the front of the line and we were able to get 5 additional.

In general, what we do is, we are improving the channels that we have, and we have taken advantage of the fact of we saw what happened here in the US with HD.

We were the first to move into HD with Discovery HD Theater, but we were also a very early mover.

We have 7 HD channels here in the US.

We went out very early, we spent a lot of capital converting content into HD.

When the cable operators here in the US said they want more HD content to drive the HD tier, we raised our hands and took 7 channels while they were available to take.

And then we saw what happened.

The market closed up and a lot of people wanted HD channels, but because they took up so much bandwidth, it was tough to get.

We took that experience and went around the world, and as we did our deals with distributors around the world, we did them for out existing channels, but we also got commitments, if they had HD, to have a number of HD channels.

If they did not have HD, we have commitments that if they do launch HD, that we will get 1 or more of the HD channels when they do launch.

Continuing to be a platform leader is key for us.

That is also why we launched the first 24-hour 3-D channel here in the US with Sony and with IMAX.

That has been a helper to us around the world because we have a ton of 3-D content, we have real experience with 3-D content and as we go around the world and we're renewing our deals, whether we do a channel or whether we just offer some 3-D content, we have channels, HD and 3-D.

I think that early mover is a gating opportunity for us.

Jim, with regard to your question on costs and growth, we look at it whether it is domestic or international very similarly.

We develop a multi-year plan and we try to lay out what are the benchmarks for success.

And if we're hitting them, we try to accelerate that investment and be very successful

ID is a good example domestically where we've tripled our investment over last few years in our programming and our ad sales have actually more than tripled.

So that worked out very well.

TLC International, very similar.

As we approach anything, any type of incremental investment, or even launching new offices, we do a multi-year plan that, if we do well, we can be a lot more aggressive with that investment.

Is ID a good international potential opportunity?

With regard to 3-D, how soon before you think that's meaningful -- 2 years, 5 years, 10 years?

Where does that fit in?

We have launched ID as a separate channel in a number of markets.

It is doing well.

We also use ID because it aligns very well with Discovery.

A number of those shows we used to make Discovery stronger around the world.

3-D has been slower than we expected.

It's going to be driven by the sets and how quick consumers adopt 3-D.

Good news for us is we've gotten a lot of experience with it.

If it transitions into a technology where you don't use glasses and it becomes robust, we will be there.

There are a number of markets where distributors feel like they need to hedge, even though the consumer demand isn't significant yet, that from a brand perspective it is important for them to have 3-D or be a leader in 3-D.

The fact that we have it is important.

The market demand has not developed yet and it would probably be the consumer electronics crew or the technology crew that could give you a better sense of if it will.

Operator we have one time for one last question please.

Vasily Karasyov, Susquehanna Financial Group.

If we were to double dip what advertising categories do you think you will see as the leading indicator of this weakness?

Can you walk us through the sequence of events in the weakening advertising environment, is it the upfront cancellations first, and then direct response increases, and then [branded] scatter pricing comes under pressure?

The ones that are most economically sensitive are usually the ones that would be the first you would see some weakness in.

That is how I would phrase it and leave it to your judgment which those are.

With regard to what happens in an environment that becomes challenging, it all depends.

If you have a scatter market that is weak or if it's still above the upfront, you may not see as much upfront cancelations.

What we saw in 2009, because we had a very upfront 2008, 2009 broadcasting upfront, we saw that over the course of 2009 a mild acceleration of those cancellations during that period of time.

DR held in there pretty well.

That's the best analog, or the most recent one that we can point to.

You don't see of those signs at this point?

At this point we have not seen any deterioration in our current market conditions.

Thank you for joining us everybody.

Please give us a call with any follow-up questions.

Thank you.

Ladies and gentlemen, this concludes your presentation.

You may now disconnect and have a great day.